Salary Exchange is a zero-cost employee benefit that increases your employees’ take-home pay (and potentially their pension pot) while also leaving more cash in your business.
What is Salary Exchange?
Salary Exchange (also referred to as Salary Sacrifice) is an agreement between the employee and the employer. The employee’s contract of employment is altered to reflect that they have agreed to exchange part of their future gross earnings in return for a non-cash benefit, such as a pension contribution.
For a simple overview of how Salary Exchange works, have a look at this video.
What are the benefits of a pensions Salary Exchange scheme?
- Both employers and employees save on National Insurance Contributions (NIC)
- Employers can reinvest any NIC savings in their business or their employees’ pension plans
- Employees get a higher take-home pay
- Employees can get a bigger retirement pot if the employer reinvests it back into their plan
- High earners get their tax relief immediately and do not have to claim it through their tax return
What do I need to take into account?
Your workers’ gross earnings will be reduced when using Salary Sacrifice. That means that benefits that rely on gross salary could be affected, for example:
- Life cover could be lower
- Borrowing available on mortgages could be lower
- Entitlement to state benefits, such as statutory parental pay and state pension
Moreover, Salary Exchange cannot reduce an employee’s salary to below the level of the National Minimum Wage.
Let’s look at an example…
Right now the employee and employer pay National Insurance on the gross salary. They then separately contribute to the workplace pension. But if the employer paid their employees workplace pension directly and the employee reduced their gross salary by that amount, then both the employer and employee pay less National Insurance.
Let’s look at an example of how salary exchange benefits the business and staff.
Rachel’s gross annual salary is £30,000. Let’s suppose you, as the employer, contribute 3% of Rachel’s total salary (£900) and Rachel contributes 5% (£1,500).
The following example outlines what could change if you were to switch to a pensions salary sacrifice arrangement:
- Rachel agrees with you, the employer, to reduce her annual salary by £1,500 (5% contribution). This results in a gross annual salary of £28,500
- As Rachel has reduced her gross salary, she is paying less NICs, saving her £180
- As Rachel has reduced her gross salary, you as the employer are also paying less NICs, saving you £207
- You can decide to keep the £207 NI savings or re-invest those into Rachel’s pension pot, giving her an extra £207 pension contribution
Why do all companies not implement Salary Exchange?
The main perceived problem with salary sacrifice is usually the hassle involved.
Salary Exchange requires changes to the employment contract or new agreements, payroll changes, compliance validations and extra monthly administration.
At Husky, we make the implementation and administration easy through automation. Our automated workflow for employment contract amendment and the Husky app make it a much smoother process. Workers can easily see their savings and apply for it through the app.
The other main reason why most small to medium businesses do not implement Salary Exchange is that they have their pension setup on Qualifying Earnings.
Qualifying earnings is the band of earnings that most small employers use to calculate contributions for auto-enrolment purposes. This way of calculating pensions makes Salary Exchange administration and calculations more complex. Therefore, most payroll systems do not support these calculations.
Husky’s product includes the calculation and administration of salary exchange for pension schemes on Qualifying Earnings, making this zero-cost employee benefit available to any size company.
Husky are proud to be a recognised leader in the pension technology space. With our cloud-based workplace pension platform and employee app, we make the entire process seamless.